Obscure China ETF Bolstered by RQFII News

By: Benzinga

Posted: 12/18/2012 2:00:00 PM

Referenced Stocks: CS;FXI;GXC;HAO;PEK

By now, many traders and investors know that China
ETFs
have bounced back in a big way due to a steady stream of
encouraging economic data points. The recent batch of economic
data releases, for the most part, indicate the world's
second-largest economy is turning around, buoying hopes for
increased commodities demand and a global turnaround in the
process.

However, one China-specific ETF is soaring higher, and it is a
name that might catch investors by surprise. As
has been previously noted
, investors are often seduced by the iShares FTSE China 25 Index
Fund (NYSE:
FXI
) because of that ETF's heft. With over $7.5 billion in assets
under management, FXI is by far the largest China ETF.

And FXI has been an impressive performer over the past month,
having soared 10.46 percent. That is a stellar run and one that
trumps the stout returns offered over the same time frame by the
Guggenheim China Small-Cap ETF (NYSE:
HAO
) and the SPDR S&P China ETF (NYSE:
GXC
), just to name two. Yet those China ETFs and scores of others
have recently paled in comparison to the gains offered by the
Market Vectors China ETF (NYSE:
PEK
).

Last month,
Benzinga reported that PEK
could be in for a pop on news the China Securities Regulatory
Commission, the People's Bank of China and the State
Administration of Foreign Exchange agreed to increase the quota
for the Renminibi Qualified Foreign Institutional Investor
(RQFII) program to $32 billion from just over $11 billion.

The reason being is that PEK, through the use of swaps and
other derivatives, tracks China's A shares market. Previously,
the RQFII rules have required international investors to keep
most of their holdings in bonds, but with stocks listed on
China's mainland rebounding, global investors are clamoring for
increased access to Chinese equities denominated in yuan.

RQFII funds, which raise yuan overseas, could benefit as China
relaxes or abolishes the rules forcing those investors to be
primarily invested in Chinese bonds,
Bloomberg reported last week
. Those headlines sent the CSI 300 Index, the Index tracked by
PEK, soaring.

Investors have taken note of the benefits offered by PEK as
China moves to, albeit slightly, open its A shares market to
foreigners. In mid-November, the ETF had just $11.9 million in
AUM. As of December 17, that total was closer to $28 million.

There is one issue investors need to be aware with PEK. "PEK
is currently trading at a premium to its net asset value. A
sustained premium can result in additional tracking error and/or
potential losses upon sale," according to Market Vectors.

The reason why this ETF often trades at a premium to its net
asset value is not a function of its ability or inability to
create or redeem shares. Rather, PEK has to enter into swap
agreements with banks and the banks charge a higher premium on
the swaps to hedge their own risk because China's A shares market
is still not widely accessible.